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Schemes advised be 'wary' of new mortality models

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UK - Pension schemes have been warned to be ‘wary’ of moving towards longevity projections based on data from the wider UK population rather than occupational scheme data, following the publication of the rationale behind a prototype mortality model.

The CMI has now issued a companion Working Paper 39 that outlines the thinking behind the development of the model, and the datasets and analysis used in choosing the “Initial Rates of Mortality Improvement for the Core parameter layer of the Model”.

However, Club Vita, the longevity analytics service for occupational schemes established by Hymans Robertson, warned that while it supports the CMI’s objective to move away from the “inherently flawed” interim cohort - which is based on insurance company data - pension schemes should “remain wary”.

Nick Flint, chief executive at Club Vita, said: “This is a good opportunity to learn from the flaws of the ‘cohort’ projections, however there is a danger that schemes may, by default, move to projections based on wider UK population data.”

“This is the wrong starting point. Our research demonstrates clearly that longevity trends in occupational schemes differ markedly from those in the wider UK population. Schemes must base their projections of current trends on the most relevant data and that can only come from other occupational schemes,” added Flint.

The latest working paper confirmed the prototype model’s initial rates of mortality improvements were “derived using an age-cohort P-Spline model fitted to Office of National Statistics (ONS) data for the population of England & Wales, for ages from 18 to 102, for the period 1961 to 2007.”

It noted “as well as providing the smoothed data from which to estimate ‘current’ rates, this approach automatically also provides rates for earlier years on a consistent basis”, although the 76-page document revealed its methodology also included analysis of its own data and of that provided by Club Vita on self-administered pension schemes.

However, Steven Baxter, longevity expert at Club Vita, added: “In the current economic climate, it is more important than ever for companies and trustees to have a reliable estimate of costs of pension promises. Relying on UK population data from the ONS for trends is misleading: Club Vita’s research has shown that trends are significantly different in occupational pension schemes.”

For example, he claimed: “We have seen the life expectancy of higher earners increase by over three years in the last decade - compared to just 1.5 years for lower earners. Allowing for these trends can easily make a £5m (€5.8m) difference to the funding of a £100m pension scheme.”

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com